The supermarket sector has reached new heights over last year. The closure of pubs, restaurants and offices, as well as the growing influence of online shopping, has bolstered the investment prospects of a sector already on solid ground.
Investment volumes in supermarkets, hypermarkets and food discount stores accounted for a record 21% of total European retail activity in 2020, up from the five year average of 7%. The performance has been so impressive that the likes of Savills have described it as the new core of retail property investment¹.
Other stand out performers include the industrial and logistics sector, which has been similarly turbocharged by pandemic conditions. Yet the immense yield squeeze and elevated asking prices which have inevitably followed raise question marks over its relative value.
Long-lease distribution warehouse yields have come in significantly over the past 12 months from 4.00% to 3.25% and are expected to go further². Conversely, we’ve been able to buy two Waitrose supermarket assets at around 5.75% with a 15 year WAULT.
The supermarket sector, underpinned by solid covenants, long leases and attractive investment fundamentals in a post-Covid world, will occupy a leading role in our investment strategy for the foreseeable future. Here’s a few of the reasons why:
Here to stay
The sector has undergone a period of record breaking growth in response to the pandemic, growing by £13bn from £192bn to £205bn between 2019 and 2020³. New sales records have been reported as recently as March⁴.
The general consensus amongst investors, real estate and supermarket experts is that the consumer’s relationship with the supermarket has changed forever. The rise of remote and flexible working, online shopping and the new-found affinity with home cooking are a few of the key explanations.
Cost savings are another pull factor. The impact on the bank balance has been so profound that it will be hard to ignore for a lot of people. Many will be thinking, why would I eat out a few times a week when I can take my family on an annual holiday instead?
The Institute of Grocery Distribution predicts food sales will surpass £21bn by 2020⁵, whilst 60% of Brits now see the supermarket as more important than it was pre-pandemic, according to Waitrose’s 2021 food and drink report⁶.
Supermarkets have also proven to be highly versatile, adaptable and multi-functional as consumer habits evolve. Other areas of the retail market have failed to illustrate similar credentials.
Omni-channel supermarkets refer to those which seamlessly respond to the demand for in-store and online shopping. Some can even operate as last-mile logistical hubs, a highly valuable feature of commercial assets in a world consumed by online shopping.
These highly efficient stores – often located in dense urban areas with strong infrastructure and 24 hour store operations – can facilitate click and collect shopping, in-store shopping and act as delivery hubs. High-profile covenants are increasingly processing planning applications for add loading bays and other logistical features to their existing store portfolio to bolster their omni-channel offering.
Leading investment bank Liberium has claimed, in reference to Supermarket Income REIT’s portfolio, omni-channel supermarkets should be compared to and valued against distribution warehouses. It’s a sentiment shared by many in the investment community.
Investors are increasingly on the hunt for stores offering this three-pronged appeal, whilst existing occupiers have a compelling reason to extend their leases.
Favourable fund structures
The structure of institutional investment funds has also played an influential role in diverting our attention towards the sector.
The MSCI is yet to budge on its classification of supermarkets as part of the wider retail market, despite mounting pressure from investment circles as sub-sectors within it take increasingly divergent routes.
The product has been one of subdued competition as many institutional funds are being forced to de-weight their retail exposure . In the face of a hazy retail landscape and intense scrutiny from their committees, funds are increasingly looking to offload unwanted assets and pile in to the more “on trend” sectors such as industrial and logistics.
It’s a scenario which is playing an instrumental role in limiting the kind of frenzy taking place in the industrial market. And for those unencumbered by the same limitations, it represents an exciting opportunity.
An exciting opportunity
Taking all of the above into consideration, it is an exciting time to be involved in the supermarket investment market. It’s a market which shows no signs of slowing any time soon.
Our acquisition of the two Waitrose sites in Scotland was a signal of our intent in the marketplace and we’ll be looking to expand our portfolio throughout the year.
If you’d like to hear more about Avignon Capital and our plans for the Supermarket sector, please get in touch.